Launch of a New CEPS Task Force Report

EMBARGOED UNTIL 16 FEBRUARY 2005, 13.00

CENTRE FOR EUROPEAN POLICY STUDIES

PRESS RELEASE

EU FINANCIAL REGULATION AND SUPERVISION BEYOND 2005 LAUNCH OF A NEW CEPS TASK FORCE REPORT

No time for a pause: this ought to be the mantra for the present Commission’s agenda in financial services. Much work remains to make the single financial market work. Indeed, recent market events, such as the Citigroup market manipulation, the LSE takeover, or foreign acquisitions in the Italian banking market, have highlighted the challenges that remain to be addressed. Retail financial markets continue to be largely fragmented, meaning that the EU may not be reaping fully the expected benefits of market integration. More importantly, the heavy and unglamorous task of enforcing the new rules only starts now. Enforcement, one of the key issues to ensure that what has been announced over the last five years will effectively work, must be followed up very closely, as it remains one of the weak elements in the post-1992 period, and the scoreboard indicators are not promising. In financial markets, the new regulatory structure should act as a powerful incentive for adequate enforcement, as it stimulates competition and peer pressure. Yet the new structure in itself is powerless to drive change where there is an absence of political will. Member states in particular need to exercise responsibility by assuming ownership of the new structure, since the job cannot -- and should not -- be left to judges and courts alone. In January 2004, CEPS formed a Task Force to discuss the agenda for EU Financial Regulation and Supervision beyond 2005. The group met four times over the period of one year, and discussed policy issues arising from EU enlargement, financial stability oversight, international cooperation, and supervisory convergence. Further highlights include:  ‘Levels test’. Excessive detail in level 1, which sets the framework principles, must be avoided by using a ‘levels test’. The most important required change in the Lamfalussy process is that there should be a clear distinction between the policy objectives of the proposal and the means to achieve them. A test would provide a clear and objective definition of what constitutes framework principles.  Regulatory Impact Analysis (RIA). A broader use of RIA in the regulatory process should be supported, as it will further enhance the quality of regulation. It will make the decision process even more transparent and may limit the regulatory burden. It should be recognised, however, that the tool is not a panacea.  The absence of users in the policy debate. The expected shift of the regulatory agenda towards retail finance will emphasise even more the absence to date of users’ voices in the policy debate. Users should take advantage of the new structure to put their views across to prevent providers’ interests from dominating the policy agenda.

1 Place du Congres, B-1000 Brussels - tel. 32.2.2293911 - www.ceps.be EMBARGOED UNTIL 16 FEBRUARY 2005, 13.00

 Supervision. Important differences persist among EU member states in supervisory competences. Convergence is expected to occur and needs to happen in conjunction with financial stability oversight, but this will demand the full cooperation of member states’ authorities. Political will needs to be marshalled to adapt to evolving market needs and to remove anachronistic elements in supervisory structures.  International cooperation. This should be extended to other countries or regions, along the lines of the fruitful EU-US dialogue. The framework needs to be further developed, however, to take account of the institutional complexities on both sides, and to allow for more transparency. The bilateral agendas should also not lose sight of the challenge for multilateral trade liberalisation in financial services.  Global competitiveness. On the post-FSAP agenda, the interaction between the regulatory burden and the competitiveness of European financial services firms, coupled with the attractiveness of EU financial centres as places to conduct international business, has emerged as an issue. The ability of financial services firms to innovate and to generate productivity growth – the key to rising living standards – should be a major concern to policy-makers. Effective regulation can help achieve this goal by overcoming market failures, so the quality of regulation is vital. Proper impact analyses should also study how regulation affects the ability of European firms to compete in global markets and of financial centres to continue to attract foreign business. Trade liberalisation is a vital ingredient in the global competitiveness of European firms, since the competitive pressures of global markets force them to innovate and to upgrade existing services. To ensure competition, equivalence in market access should apply globally.

Karel Lannoo and Jean-Pierre Casey (rapporteurs), EU Financial Regulation and Supervision beyond 2005, CEPS Task Force Report No. 54, February 2005, 66 pp., figures and tables. The report can be ordered in PDF (€10) or printed form (€25) from the CEPS on-line shop (shop.ceps.be).

About CEPS and the authors CEPS is an independent European policy think-tank, based in Brussels. CEPS has acquired a solid reputation for research into macroeconomic policy, European financial market integration, trade and energy policy. It is funded by membership dues, official grants and project income. The report is co-authored by Karel Lannoo CEPS chief executive and Jean-Pierre Casey, research fellow. Members of the Task Force provided detailed comments on earlier drafts of the report.

For more information or if you have questions, please call: Jean-Pierre Casey, +32.2.229 3958 Karel Lannoo, +32.2.229 3965

Should you wish to receive a copy of the report (press only!), please contact Marco Incerti at CEPS ([email protected], +32 2 229 3970).

1 Place du Congres, B-1000 Brussels - tel. 32.2.2293911 - www.ceps.be